How can I finance my business using Equity Finance?

Have you started your first business? Are you a serial entrepreneur? Is your business growing quickly, and now you need more funding to support this growth? Do you want to hire new staff and purchase new equipment? Are you keen to fund an extensive marketing and promotion campaign? This article is one of a five-part series on how to finance your business. The article focuses on issuing shares in your company – a method known as equity finance.

What is Equity Finance?

Equity finance is a way to generate funding for your business without going into debt, is to issue shares to investors. You can issue different types of shares, for example, ordinary shares or preference shares.

There are strict rules on issuing equity. There is a suite of rules and requirements for a listed public company, and a suite of rules and requirements for a private company or an unlisted public company. If you have a proprietary (private) company, you can only offer your shares to existing shareholders, employees and certain classes of investors. Please seek legal advice on this to avoid breaching the law. Ordinary shares are common shares, usually with one vote for each share. With preference shares, the investors may or may not have voting rights, but they may have preferential rights to dividends and/or a liquidation preference if the business is sold. This means they will be the first ones to be repaid their investment if you sell your business, even before yourself and your employees. They may negotiate a multiple, for example, they receive twice their investment back.

The main advantage of equity finance is that by issuing shares to investors, you may avoid taking on debt. This means that your revenue can be used to grow the business, as you are not required to pay the investment back. You share the risk of your business with the investors.

The main disadvantage of equity finance is that you are sharing the value and ownership of your business with the other shareholders. They will negotiate investment terms. They will likely negotiate what oversight and control they have, and impose requirements around the sale of shares and exit.

Conclusion

Is equity finance right for you? It may be an excellent option to enable you to bring in wise investors who can help you grow your business. You are, however, sharing ownership and control, which is a significant issue to consider.

The terms are crucial. You need a shareholders agreement and to comply with legal and ASIC requirements for issuing shares. LegalVision can assist.

Please seek legal advice to help you create and negotiate the shareholders agreement. Please also ensure that you properly comply with the company secretarial and ASIC requirements to issue the shares.

LegalVision can help create or review your shareholders agreement; to help put you in a strong position and to advise you on the issues that investors raise. LegalVision can help with the company secretarial and ASIC requirements too.

Next steps

Can LegalVision assist you with your equity capital raising? LegalVision provides businesses and individuals with tailored online legal advice, including drafting legal agreements. We have capital raising lawyers with local and international experience, and with large and small business experience. We will advise and help protect you. Call LegalVision on 1300 544 755.

Ursula is General Counsel at LegalVision. She has over 15 years' local and international investment banking and corporate law experience. Ursula has expertise in capital raising, mergers and acquisitions, information technology and general corporate law. Ursula is an active member of Australia's entrepreneur community and speaks, writes and is interviewed on issues relevant to startups and established businesses.

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